In yet another strike at curbing corruption in India, the government launched fresh plans to confiscate a massive chunk of black money deposited in the bank accounts after the demonetisation move. The Narendra Modi government plans to allow black money holders in possession of now-banned Rs 500 and Rs 1000 notes to retain up to 50 per cent of the money, if, they voluntarily confess they hid the cash from tax officials.
The plan was revealed in the Parliament on Monday in tabled amendments to the Income Tax Act, amid tensions faced by the Centre with the consequences of the note ban. The Bill was passed on Tuesday. Those who fail to make the disclosure, will face the risk of losing over 85 per cent of their newly deposited funds. Narendra Modi, in an announcement that took the nation by surprise, put a prohibition on using Rs 500 and 1000 notes which make up for at least 86 per cent of the cash in circulation. In the initial 10 days after the ban, the Reserve Bank of India said over 10 billion-worth of banned notes, out of $220 billion of high value notes in circulation, were returned.
"Instead of allowing people to find illegal ways of converting their black money... the government should give them an opportunity to pay heavy taxes with penalty and allow them to come clean," the finance ministry announced. Under the new tax amendments, Indians who admit that their post-cash ban deposits were of previously unaccounted cash can pay half of their total in income tax, penalty and surcharge, and keep the rest. However, the depositor will only be able to use 25 per cent of the amount with the remaining sum locked in an interest-free deposit scheme for four years before it is returned. Those who fail to admit to their unaccounted cash before the end of the current year, will be made to pay up to 85 per cent of their hidden wealth if the tax inspectors catch them.
Saurabh Mukherjea, chief executive of institutional equities at investment bank Ambit Capital, said, "It's a voluntary income disclosure scheme with 'voluntary' in inverted commas. If you went to put money in the bank last week and stood in line for six hours, now you have to decide which bucket do you fall into." He said the scheme would sharply reduce the flow of banned notes being deposited in banks, as Indians would be loath to invite the scrutiny of IT officials. The latest plan follows an income disclosure scheme in which India declared $9.8 billion of hidden wealth.
Meanwhile, the RBI indulged itself in a bond-buying spree, bringing down interest rates and prompting fears of inflation and shortage of bonds. Over the weekend, the central bank said it was bringing in the temporary bond-buying restrictions to tackle "large excess liquidity in the system." With people gushing in to deposit the old notes, around Rs 6 billion were put into the Indian banks. They in turn, brought Rs 4.3 billion worth of government bonds with the extra money, causing prices to jump and the yield on the 10-year bond to fall more than 50 basis points to its lowest in seven years. However, with the new announcement, all the extra cash will have to be deposited with the RBI.
Bond-buying spree
Shaktie Shukla, founder of Kaithora Capital said, "The liquidity sweep will definitely halt the down move in yields. It will also temper the pre-RBI policy." Indian economist Kunal Kundu said, "Banks are reacting way too soon to the accumulation of cheap deposits by cutting the various savings rates." Experts said the move indicates that the RBI was more worried about falling rates sparking inflation than the drop in economic activity causing stagnation.
The demonetisation move announced on November 8 triggered historic mass panic. What Modi vouches to be a well-thought out plan that will only result in a promising future for the nation, saw banks thronged with people, most of them fretting over the large black money they painstakingly accumulated over the years. As the dust on the charade settles down, the corporate sector has just begun to get the hang of the prospective changes companies will see in the future. While digitisation has gotten a much deserved boost with online payment companies reporting a hundred per cent rise in the demand of their services, other sectors have valid reasons to question the government's sanity.
Market worries
Most predict a pause growth for the Indian economy which has been running at more than 7 per cent a year. The Sensex share index has lost 6 per cent since the announcement, falling under 26,000 for the first time since May. Abhay Laijawala, head of India research at Deutsche Bank said, "The government remains extremely growth biased. This could go down in the annals of Indian history as a massive transfer of wealth from those who were hoarding cash to ordinary people." Economist Jean Drèze described the move as "shooting at the tyres of a racing car."
Different sectors will feel varying degrees of pain or benefit. The most benefited would be the banking sector. The most agonised institutions at present, banks are most likely to see a major boost to their balance sheets, as a slew of money that might have otherwise stayed in cash is now being dutifully deposited. A Deutsche Bank analysis suggested 80 per cent of the country's notes will return to the banking system, which will increase deposit growth by up to 10 per cent. Analysts said they expect about half of that to stay in the system long term, which will increase deposit growth up to 10 per cent. The catch, however, is that both consumer spending and the housing market are expected to slow in the next few months as people leash in their spending and companies struggle to keep their supply chains going sans hard money.
Consumer goods companies are currently reeling under the shortage of money. CM Singh, chief operating officer of Videocon, said 40 per cent of his company's purchases come via cash. Vivek Bali, India chief executive of Sephora said he thought it could hit sales by 20 to 25 per cent until December. Companies with large financial clout are also made to adjust. A multinational consumer company said it was considering renegotiating credit terms with its small-scale distributors around the country that have seen sales collapse.
There were, however, companies, that felt a short-term turbulance. Chairman of Gitanjali Group, Mehul Choksi said that on the evening of the announcement, his company traded in two hours what it usually trades on a busy day.
The Indian property market is the worst hit from demonetisation, as buying or building real estate has been the most common way of laundering unaccounted currency. Liases Foras, a property research company estimated that real estate transactions in India involving illicit cash tagged somewhere between 15 to 20 per cent. Credit Suisse analysts said, "It may take several years for currency to normalise in the 'black' economy. This would slow down transactions, and hurt prices of real estate and land." Some expect property prices to go high in the future, but there are contradictions claiming developers could benefit in the long run. "We would expect to see prices stay where they are or fall for the next two years. But developers might see their own costs, both in terms of land and construction costs, come down even further," said Pankaj Kapoor, managing director of Liases Foras.
This is the perfect time for the E-commerce market to shine. Executives from companies including Amazon, Flipkart, and Snapdeal, welcomed the move. Sanjay Sethi, chief executive at ShopClues, said the fall in cash-on-delivery transactions has offset the rise in card payments. Several online platforms even put temporary restrictions on purchases paid for by cash. Many in the industry remain perky about what this could yield for the online market in the long term.
India to go from being a data poor-to-data rich country:Nilekani
Nandan Nilekani, one of the founders of Infosys, and Aadhar card originator, said, "Demonetisation will give a huge fillip to the whole cashless movement. What would have taken another 3-6 years to get rolled out, I now believe because of the urgency of the matter, will happen in 3-6 months. There will definitely be some amount of short-term pain in the coming weeks. But you will see this acceleration is going to benefit everybody."
"The more important thing is when the economy becomes formal, when everybody's financial transactions are digitised... India is going to go from data poor to data rich and that will make it more and more difficult for people to do dishonest things or to be outside the system. You will reduce the amount of black money in the system," he added.
